Our Steering Concept
We have firmly anchored our goal of growing profitably and to creating value for society in our strategy. Both financial and nonfinancial key figures are an integral part of our steering concept. Until the end of 2023, return on capital employed (ROCE) and CO2 emissions were our most important key performance indicators. From 2024 onward, we will pursue a Differentiated Steering concept. Industry-specific key performance indicators tailored to the respective business will enable us to increase the competitiveness of our business units and thus the profitability of the BASF Group. We use EBITDA before special items and free cash flow as the new most important key performance indicators for short and medium-term steering. ROCE will continue to play a central role as a medium-term strategic steering indicator.
The BASF Group’s steering concept in 2023
Until now, the return on capital employed (ROCE) was used as the key target and steering indicator for the BASF Group. In line with our strategic targets, we aimed to achieve a ROCE considerably above the cost of capital percentage every year. With ROCE, the same data was used for our value-based management, external communication with the capital markets and variable compensation.
We are also pursuing the target of reducing our greenhouse gas emissions. Therefore, CO2 emissions (Scope 1 and 2)¹ are defined as a steering-relevant indicator, and we report on them as the most important nonfinancial key performance indicator. By 2030, we want to reduce our absolute greenhouse gas emissions by 25% compared with the 2018 baseline.
1 Scope 1 and Scope 2 (excluding the sale of energy to third parties). Greenhouse gases are converted into CO2 equivalents (CO2e) in accordance with the Greenhouse Gas Protocol.
Further development of the steering concept as of 2024
To increase the value creation of the individual operating divisions, we are introducing a Differentiated Steering concept, which we will report on at segment level. Key criteria in the selection of specific steering indicators are the respective strategic direction of the business, the role of the business in BASF’s portfolio and the contribution of the business to achieve corporate targets. We are focusing on industry-specific value drivers, which enables us to better integrate market conditions into our management and strengthen our business operations. We will also benchmark our performance even more closely against that of our competitors.
This is why we have further developed our financial steering concept for the financial years from 2024 onward. Here, we will differentiate between short-term and medium-term steering more clearly than before. We have established two new most important financial key performance indicators for the BASF Group’s steering:
- Income from operations before depreciation, amortization and special items (EBITDA before special items)
- Free cash flow
ROCE, our most important financial key performance indicator up to and including the 2023 business year, is significantly influenced by strategic decisions such as acquisitions and divestitures as well as investments. Short-term influencing factors, such as the development of earnings or current operating assets, can be better controlled directly via earnings or cash flow figures.
Return on capital employed remains a medium-term key financial target for the BASF Group. We use ROCE to emphasize the importance of managing our return on capital employed over time.
Scope 1 and 2 CO2 emissions remain the most important nonfinancial key performance indicator at Group level. We see sustainability as a decisive factor for our long-term business success.
The differentiated approach to steering the operating business units takes into account the different business models of the segments. In the future, capital-intensive segments (Chemicals, Materials, Surface Technologies and Agricultural Solutions) will be measured by their absolute contribution to EBITDA before special items, an earnings indicator that describes operational performance independent of age-related depreciation and amortization of assets and any impairment or reversal of impairment. The key figure is therefore particularly suitable for indicating the profitability of a business and for comparisons with businesses in similar sectors.
The success of the Industrial Solutions and Nutrition & Care segments primarily depends on the generation of new and profitable business. Therefore, the most effective measure of their performance is a combination of sales growth and margin. Accordingly, the EBITDA margin before special items is the link to the BASF Group’s key performance indicator.
To manage cash flow at segment level, we use a specific key figure, segment cash flow, which includes the elements of free cash flow that can be managed by the operating divisions. This key performance indicator is relevant in all segments.
Differentiated financial steering approach of the BASF Group as of 2024
The target agreement process is an important part of our value-based management. It aligns individual employee targets with BASF’s targets. The most important financial indicator in the operating business has so far been ROCE. The other units’ contribution to value is also assessed according to effectiveness and efficiency on the basis of quality and cost targets. To assess this, we use metrics such as BASF’s internal service score in the service units.
We are gradually adapting the target agreement process to the Differentiated Steering concept. From 2024 onward, variable compensation for senior executives in all business units and the Service, Research and Corporate Center units will be based on targets derived from the new key performance indicators for the steering of the respective business unit or the BASF Group.
For the BASF Group, we have been using EBIT before special items and capital expenditures (capex) until now as key performance indicators that have a direct impact on ROCE. EBIT before special items is used to steer profitability at Group and segment level. Capital expenditures are used to manage capital employed in the BASF Group. These comprise additions to property, plant and equipment excluding additions from acquisitions, IT investments, restoration obligations and right-of-use assets arising from leases. Furthermore, we have been commenting on and forecasting sales at Group and segment level so far in our financial reporting as a significant driver for EBIT before special items and our most important key performance indicator, ROCE.
In line with the new steering concept, in future financial reporting, we will comment on and forecast the most important key performance indicators EBITDA before special items and free cash flow for the BASF Group and EBITDA before special items and segment cash flow for the segments. We will continue to forecast capital expenditures on property, plant and equipment1 as a key factor for free cash flow.
In addition, we will continue to analyze and comment on sales at Group and segment level, but we will not forecast them.
1 Additions to property, plant and equipment excluding acquisitions, restoration obligations, IT investments and right-of-use assets arising from leases
ROCE is calculated as the EBIT of the segments as a percentage of the average cost of capital basis.
To calculate the EBIT of the segments, we take the BASF Group’s EBIT and deduct the EBIT of activities recognized under Other, which are not allocated to the divisions.
The cost of capital basis is calculated using the month-end figures and consists of the operating assets of the segments. Operating assets comprise the current and noncurrent asset items of the segments. They include property, plant and equipment as well as intangible fixed assets, integral investments accounted for using the equity method, inventories, trade accounts receivable, miscellaneous assets generated by core business activities and, if applicable, the assets of disposal groups. The cost of capital basis also includes customer and supplier financing.
We have integrated the cost of capital percentage into our ROCE target as a comparative figure. This is determined using the weighted cost of capital from equity and borrowing costs (weighted average cost of capital). To calculate a pretax figure similar to EBIT, the cost of capital is adjusted using the projected tax rate for the BASF Group for the business year. In addition, the projected net expense of Other is already provided for by an adjustment to the cost of capital percentage. The cost of equity is ascertained using the capital asset pricing model. Borrowing costs are determined based on the financing costs of the BASF Group. The cost of capital percentage for 2024 is 10% (2023: 9%).
We calculate the BASF Group’s absolute CO2 emissions on the basis of greenhouse gas emissions, which are the sum of direct emissions from production processes and the generation of steam and electricity (Scope 1), as well as indirect emissions from the purchase of energy (Scope 2). Direct emissions from the generation of energy for third parties are not considered here. Relevant emissions include other greenhouse gases according to the Greenhouse Gas Protocol, which are converted into CO2 equivalents.
EBITDA is the result from income from operations reported in the Consolidated Financial Statements plus depreciation, amortization, impairments and reversals of impairments on property, plant and equipment and intangible assets. This is adjusted for special items that may arise from the integration of acquired businesses, from restructuring measures, gains or losses resulting from divestitures and sales of shareholdings, and other expenses and income that arise outside of ordinary business activities. The EBITDA margin before special items is calculated as the ratio of EBITDA before special items to sales revenue. This relative indicator enables operational performance to be compared independently of the size of the underlying business.
Segment cash flow measures the cash inflow and outflow of a segment and thus the contribution to the BASF Group’s free cash flow. It includes only those amounts that can be controlled by the segment and is calculated from the EBITDA, changes in inventories and trade accounts receivable, other extraordinary adjustments, for example in connection with acquisitions and divestitures, less payments made for property, plant and equipment and intangible assets. The BASF Group’s free cash flow additionally includes transactions that are not allocated to operations as well as adjustments of other noncash effects. Free cash flow is the cash flows from operating activities less payments made for property, plant and equipment and intangible assets.
Reconciliation of segment cash flow to free cash flow
|+ Changes in inventories
|+ Changes in trade accounts receivable
|+ Other changes
|- Payments made for property, plant and equipment and intangible assets
|= Segment cash flow
|+ Net income from shareholdings
|+ Financial result
|+ Income taxes
|+ Changes in other balance sheet items and adjustment of other noncash effects
|= Free cash flow